Time varying risk premium and the predictive power of the Australian term structure of interest rates

Article Abstract:

Using weekly data on bank accepted bills over the 1976 to 1993 period, this paper provides direct evidence of the presence of a term premium in the Australian term structure. The term premium is shown to vary over time and have an adverse effect on the predictive power of the term structure. The variance of the expected term premium is quantified in terms of its lower bound relative to the upper bound of the variance of the rational expectations error. This ratio is observed to vary over sample sub periods and rise to a high of one in some periods which include the period immediately prior to the market crash. (Reprinted by permission of the publisher.)

Forecasts and trends, Interest rates, Economic forecasting

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On the 'Unanimity' Literature and the Security Market Line Criterion: A Note

Article Abstract:

Booth questions the conclusions of Aivazian and Callen (1981) that the security market line criterion for evaluating possible investment projects is unanimously acceptable and optimal. Even if certainty is assumed, shareholder unanimity would break down. In fact, unanimity and value maximization will always diverge except for zero net present value projects. Since the net present value of investment projects under monopoly conditions is necessarily greater than zero, unanimity necessarily breaks down. Therefore, it is misleading to conclude that optimality and unanimity of investment criterion can exist with monopoly power.

Economics, Industrial efficiency, Economic efficiency, Criticism and interpretation

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A Note on Investment Decision Rules Based on Utility Functions

Article Abstract:

When ranking investment prospects in terms of expected utility maximization, risk and uncertainty are used as evaluative criteria. Expected return and variance of the investment are used to formulate portfolios consistent with utility maximization. However, a quadratic utility function is not sufficient to formulate these portfolios. Either restrictions must be made on the distribution of returns, or the decision rules must use information on all the moments of probability density function, to ensure investment ranking consistent with utility maximization.

Models, Investment analysis, Securities analysis

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